Transfer home into LLC
Scott PyrczPro Member
Real Estate Agent · Brooklyn, NY · Member since 2016 · 13 posts · 5 votes@scott pyrcz,
My understanding is that, while it may be rare, transferring the deed to an entity can trigger the due on sale clause in the mortgage, allowing the bank to call the loan. When I began my REI education, all of 7 months ago lol, I was very interested in "subject to" financing but for me personally, any risk of the mortgage being called is way too much for me. I hope this helps. Good luck!
Scott Pyrcz John Anderson yes be sure to change the name on your insurance policy to the LLC. Otherwise the property isn't covered. That's also where the lender will find out you changed the deed. The insurance has to notify the lender of any changes. That's when you will find out if they are going to accelerate the loan. It's a poor bet unless you can pay the note off or they allow you to change it back or maybe do a re-fi?? Is it worth the risk or is it better to just buy an umbrella policy? The LLC provides positively NO tax advantage. All an LLC does is provide legal maneuvering to protect assets. Totally not worth it for 1 or 2 properties. Really wats your liability risk as a land lord? Maybe a slip and fall or something like that. That's where your property liability and umbrella come in to play. They can only sue for your equity anyhow. They cannot sue for the banks equity. Most you can loose is your down pmnt and loan pay down. Is it worth the risk of the bank calling a note due?? RR
Is this true? I was always under the impression a tenant could sue you and your family for "Everything your worth" if they slipped and broke a leg because of Landlord negligence ?
@Par Attaran they can sue you but they can sue your LLC too. the first one to pay is your liabilty insurance. I carry 500k on each house. This amount adds about 25 dollars a year premium to the required amount. Then comes the umbrella. I carry $1,000,000 here. It cost $350 a year for 9 doors. They also provide attorneys for your defense. If the broken leg is worth more than that ($1,500,000 total) they can either sue you or your LLC for more money. Now they can get whatever part of the house YOU (not the banks part) own. I.e. Your 20% down payment is all they can get here. How many judges do you think are gonna value a broken leg that high?? Are they really gonna sue for a 25% down payment and whatever cash you have after they already got 1.5 mil? Oh yeah you need a LLC for each house to do it right because they can get everything in the LLC. If you have 5 houses in one LLC they can get 5 down payments. Or the cash equivalent of same. It would have to be some big shot athlete or somebody that made a ton of money on his legs to get that big of an award. Your personal value is not going to be much in comparison to what they would have already collected before they could sue you or your LLC. RR
@Account Closed that's right John that's why you want the umbrella policy and the higher liability insurance on the property. The lawyer is going to chase the money not you. Your value should pale to your insurance value. As you grow you gotta get bigger policy's. We are talking about rentals i.e. Low risk that's why the insurance is so cheap. It would be different if we were using dynamite to demolish buildings. Or operating large commercial airlines. Then we could be sued for the lives of many people if we screwed up. Negligence on our part might end in an electrical fire or something unusual but it's pretty slim odds unless you are just foolish. Then you need to be sued. RR
@Pat Marco That is an interesting strategy that I have not heard proposed before. It seems like it would provide great asset protection without having to set a up a new LLC for every property. However, how would it affect the ability to get more funding, or trying to refinance? are then any other negatives to using this strategy?
Basically when a lender looks at the property it will look like you have no equity and will probably be hesitant to lend more money.
Another tip, if you put an asset into an LLC, make sure the name of the LLC is a random name. DO NOT use any part of your name in the LLC. As stated, an LLC is utilized to compartmentalize your assets, using a common name or theme name. This way it is more difficult to track if and what assets you own in case someone want to sue you for car accident, property damage etc?
I have one colleague who owns over 100 SFR's and he swears by just keeping it in his name and getting a great insurance with a huge umbrella policy. He saves money by not developing the LLC & get better insurance.
To each their own.
@Scott Pyrcz Keeping it to the point - Will your note get called if you move the property under your investor LLC?
1. Nowhere in the Fannie Mae deed of trust does it says that you are prohibited of doing so. It only gives the lender the option to accelerate the note if they choose to.
2. Lenders VERY rarely do so. What's a lender more worried about? Technical or monetary default? Yes, you might get a mean letter from them but as long as you're making payments on time they'll probably dedicate themselves to chasing people that actually owe them money.
Sorry for not giving you a binary answer. I just wanted to share some practical aspects on this issue.
@Daniel Roca I'm posting from a cell phone so I can't put the link in this post but if you search the BP site for "bank called my note due!" You will find a post by a very prominent and successful poster on BP who actually had this happen to him. His first name is Serge. I can't recall the last name. Might change your view point a bit. Rare occurance? Agreed! Formation of LLC cost, increased hassle, and book keeping cost versus benifit of protecting equity in 1 or 2 houses? Neglegable at best. RR
BEWARE! In PA if you transfer a property from your name to the LLC, you will still have to pay like 2% of the property's value for the transfer!
I had no idea about this and created an LLC, but have read about this PA exception in several places including posts from people here that know a lot more than I do. I just caution you to do your research before you do. In some situations it might be worth to carry the 2% cost.
The other thing, I am not sure how recommendable it is to create an LLC in another state... as far as I know, you will still have to register in PA, so again, check with others that know more than I do, as I am fairly new at this, but these are things I have been looking up myself!
Good luck!
You can transfer title for asset protection proposes with out the lender calling the loan in because of the due on sale clause.
Besides what bank is going to call a loan in that's current????
It usually cost a big bank $10,000.00 to do a foreclosure.
I'm sure the person that started the foreclosure would get fired if the loan is current.
They might threaten but they wont do it. Just be sure to add the LLC to your insurance policy and keep your name on the policy too.
It is easier to get loans, insurance etc and transact under your own name
If you were doing this llc transfer because of asset proportion, well, contrary to common belief, the llc does NOT protect the asset, it only isolates it from other assets
If you have a home in an llc and you have equity in that home they will go after the equity by suing the llc anyway - even if you don't pay right away they can force the llc to sell and get paid
The best way to protect your assets is
1) keep the property in your name or whatever entity name you have currently
2) set up a Wyoming LLC and draft the OA to have several business purposes and Ibe of them should be asset protection
3) capitalize the entity by placing a promissory note equal to the equity you have in the property you are trying to protect
4) record a lien against the property payable to the Wy llc
5) you would have a 1st lien to some bank and the 2nd lien to your Wy llc
6) the llc is tax neutral because it should be a flow through entity back to your living trust
Anyone trying to sue you will see that
1) you have insurance
2)you have 2 liens and no equity
3) they will end up settling with your insurance
When you sell the house, you simply show the title co. That you have the certificate of ownership of the llc and can remove the lien at any time
Simple, inexpensive, powerful and you can add as many properties anywhere in the US and strip their equity in the same way with just one llc
Cost:
Setting up a Wy LLC maybe less than $1k with the registered agent etc
But the cost would be to draft a good OA that has the business reasons and ways to avoid the charging order etc - that would need an attorney who specializes in this kind of structures and the cost would be somewhere around $3k to $4k
Then you would need an attorney who knows how to draft the lien in a way that would. E based not on a loan but on capitalizing the entity in Wy - with a minimum of one payment per year and deferring interest to the ballon payment at the end of 30 years and clauses for cancellations etc that would cost you another $3k to $4k
Total if you do it on your own probably around $10k - still a lot less than any attorney packages that make you transfer each of your properties to LLCs and then they set up anonymous corporations in NV with trust accounts etc a total mess so they can tie you up with on going fees
The WY llc structure is set up in 72 hours - it can be canceled in a day and it has zero impact on your taxes plus it is form of probate - private message me and I can give you the attorney's firm that set it up for me for less than $5k I have several properties all over the US
Why Wyoming vs another state? NV, RI etc?
@Hal W., The reason I use Wyoming LLC might be biased, but I know that it is one of the cheaper ones to set up and maintain at $100 initial fee and $50 annual renewal, also we have no state tax and Wyoming, I have been told is the state that started the LLC business. I have also read in other forums that Wyoming has the best protection, if that is the right word for it, to separate personal from business if you follow complete separation ie as an example not mixing personal money with business money and keeping everything associated with the LLC separate from all personal things. Nevada also has a very good LLC but I don't know enough about theirs or RI's to mention anything accurately. I purchased a 6 unit Apartment in St. Louis Missouri with my Wyoming LLC and registered it as a foreign entity.